Retire 40% Slower

A Bank of Montreal advertisement in the Vancouver Sun recently caught my eye, promoting principal-protected notes (PPNs). The ad claimed investors could "Retire 12.2% Faster" using a 5-year BMO S&P/TSX 60 Market Index GIC.

The note matured November 1, 2007, delivering 12.2% compounded annually, which equated to a 78.1% total return with a 65% participation rate. The underlying index, meanwhile, returned 133.8% over the same five years.

$10,000 invested in the BMO note grew to $17,781. The same amount invested in an ETF tracking the index would have grown to $23,376 — roughly 34% more.

The comparison doesn't stop there. PPN gains are taxed as income, while ETF gains receive capital gains treatment. There's also the matter of dividends excluded from the index calculation, and ETF fees to account for.

Once you factor in taxes and dividends, the actual return difference exceeds 40%. Investors surrender substantial returns in exchange for principal protection they may not have needed in the first place.